Cynicism towards fund research misplaced
Research houses’ independence isn’t compromised by fund managers paying them, the boss of New Zealand’s oldest research firm says, and a fund manager agrees.
Friday, January 18th 2013, 9:24AM 
8 Comments
by Niko Kloeten
Head of Fundsource Sam Stanley said he had been surprised by the cynicism shown by some advisers towards the research process, particularly after the FundSource awards late last year.
“If you were a fantastic performer and didn’t win [at the awards] it’s not because you didn’t pay us enough money,” he said.
Stanley said it seemed to be advisers who questioned the integrity of the process, while fund managers were happy with it.
“The ones who open themselves up to be reviewed by us are the ones who appreciate our research and also pay for it,” he said.
“We are a business and we have analysts, very good analysts, and that costs money therefore we need to cover our costs. If they’ve already paid us we can still give them a one-star rating.”
Morningstar head of research Chris Douglas said Morningstar does not accept payment for reviewing fund managers’ products.
However, he said if fund managers want to promote their rating they need to pay for what he described as Morningstar’s “IP”.
Douglas acknowledged it wasn’t common for firms to want to pay to publicise a poor rating.
“There are a few examples where fund managers have paid to promote an average rating… it doesn’t happen a lot but it does happen,” he said.
Douglas said payment for promoting fund ratings made up a small part of Morningstar’s income, which was mostly from selling data and subscriptions to its services.
Pathfinder Asset Management executive director John Berry said paying to be researched is “a cost of doing business” for fund managers and it has no impact on the “rigorous” process the research houses follow.
Berry said it’s difficult to raise money in funds that haven’t been researched, such as Pathfinder’s International Equity Fund which has raised about $13 million in just over a year.
“We can’t market it; there’s just no point into the market and beating the drum if it hasn’t been researched,” he said.
“They want to see it have some time in the market before they research it… if they were just after the money they would have researched it straight away.”
Niko Kloeten can be contacted at niko@goodreturns.co.nz
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Comments from our readers
John Berry not included, he talks common sense
Research is a useful first screen to sort out the wheat from the chaff... albeit a bit of common sense goes a long way.
It's also worth avoiding last years "best ideas" or those entities with significant commercial risks... as the Managers will rarely inform the industry when things are looking grim.
To do that efficiently, researchers need significant resources at their disposal.
Recall also FundSource's contribution to the shares vs residential debate when they used a gross index to measure share performance and a capital index to measure property.
OMG again.
So, I'm not sure if both Smartshares if it's possible for Smartshares to be wrong, if they're misreporting their performance they're n big trouble.
Also, of the 'major' fund managers, the only manager that this Smartfonz outperformed was the Fisher Growth Fund and this was by only a few basis points.
I don't follow active managers but I did note a couple did less.
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With the universe of products available in NZ increasingly including offshore capabilities, it is essential that the screening process has the ability to reach into the international engine rooms, to fully understand how these managers are able to add value. This globalised approach tends to favour those research entities with offshore affiliations or offices… making it difficult for localized research groups to compete.
Research is typically a high cost, low margin business where scale is a major factor – especially in a small community such as NZ, where there is probably only room for 2 providers.